A rise in VAT would hit the poor, threaten jobs and lead to more expensive mortgages, union leaders have warned.

The average household could lose out on £425-per-year

The TUC criticised a VAT rise as one of the ‘least progressive’ ways the government could tackle its debts.

And experts warn that it could cost the average household £425 a year.

Ahead of next week’s budget, the TUC calculates the poorest fifth of households spend twice the percentage of their disposable income on VAT as the richest fifth. Food and children’s clothes are exempt but so are private health and private education.

The TUC report said increasing VAT would feed directly through to inflation, with possible interest rate rises leading to higher borrowing costs for companies and bigger mortgage bills for consumers.

TUC general secretary Brendan Barber said: ‘VAT increases don’t just hit the poor more, they also hit small firms, threaten retail jobs and by boosting inflation could lead to higher interest rates.’

Accounting firm KPMG added that a VAT increase could hit businesses, such as retail and financial services, hard.

Malcolm Edge, head of national markets at KPMG, said: ‘Such a move could stifle consumer spending, hampering the recovery and it could cost the average household £425 a year.’